My Turn: Reinstating state income tax is essential to long-range plan

Posted: Thursday, April 01, 2004

By CARL S. BENSON

Bengt called again from Minnesota. He left Alaska just before the permanent fund dividend (PFD) program started. He said, "The idea of spending earnings from the permanent fund is not new. Indeed, the original intent of the fund was to set aside some income from nonrenewable resources to create a sustainable income for the future." I told him this has been so successful that earnings from the permanent fund now are the largest single source of income for Alaska. Yet the earnings are not counted as income. And we have essentially no taxes.

Bengt said, "Other states use their tax base, but Alaska does not. The situation is so absurd that one has to ask, why?" I told him, "Alaskans don't like to pay taxes." Bengt chuckled, "It's like belonging to a club and refusing to pay the dues. Worse yet, it's like asking the club to pay your dues." He knows the Legislature repealed our income tax just after he left Alaska, and has made no other serious attempt to raise revenue. Instead of raising revenues, our Legislature mails about a thousand dollars to everyone who spends a year here. Our Legislature's leadership wonders why we have a deficit and whether we need a long-range fiscal plan. This all sounds like a joke, but I am not making it up.

Alaska's population increased by more than 80,000 people during the past decade. Yet during that time Alaska's Legislature met increasing needs solely by cutting its budget. Budget cuts were made despite population growth, despite inflation, and despite increased needs and demands for state services. The latest cuts eliminated municipal revenue sharing and forced local governments to cut schools and other services in the wealthiest of all states.

Clearly, we need a long-range fiscal plan. And reinstating our state income tax must be an essential component of it. Alaska never has had a statewide sales tax, but it had an income tax that served us well from 1948 to 1980. It was very simple to calculate, just a percentage of the amount actually paid to the federal IRS.

A statewide sales tax is inadvisable because: (1) It regressively taxes poor people disproportionately; (2) It disproportionately taxes rural Alaska where costs are already higher; (3) A complex statewide system would be required to administer it; (4) Decisions on sales taxes should be left to local governments, some of which already have them.

Bengt and I propose: (1) Reinstate our state income tax as a simple percentage of the actual federal tax, as before; (2) Match income raised by the income tax with money from earnings of our investment accounts, namely the permanent fund and the Constitutional Budget Reserve.

The amount raised by the proposed tax would be considerably less than the amount paid out as the PFD. The income tax would be fair; people for whom the dividend means the most would pay the least, and people for whom the dividend means the least would pay the most, but their dividend would pay most or all of their tax. And income tax paid to the state would be deductible from the federal tax, as before. This means more Alaskan money would stay in Alaska, the state we say we love.

Our state income tax would again tax the income of nonresidents. (Tampering with the PFD only taxes Alaskans.) Currently, about 10 percent (nearly $1 billion) of all the wages and salaries paid in Alaska go to nonresidents who contribute nothing to pay for state services. It is especially important to reinstate our income tax before hordes of people come here to build the gas line.

Public hearings and letters consistently show support for reinstating our income tax. Combining income tax with earnings needs serious consideration. It would provide a first estimate on how to use some earnings, it would start us on the way to a meaningful long-range fiscal plan, and it would leave our savings accounts intact. Bengt said, "Think about it."

 Carl S. Benson, PhD is Professor of Geology and Geophysics, Emeritus at the Geophysical Institute, University of Alaska Fairbanks.